Why The Debt Ceiling Is Different Than The Shutdown And Worth Freaking Out About

While the first Congressional stalemate resulted in a government shutdown, the next fight will be over raising the debt ceiling, with the deadline looming on October 17. The two battles have ended up ensnared together due to their close timing. But there are major differences and the failure to act carries very different consequences.

What The Fight Is Over

Shutdown

The government shut down on Monday night because Congress failed to pass a short-term extension of funding, known as a continuing resolution (or CR), by September 30, which would have kept agencies up and running. Typically, in “regular order,” the House and Senate both pass full budgets and then a bipartisan group of lawmakers hash out the differences to create a single budget that then guides specific bills to fund government operations. But after the Senate passed a budget in April, Republicans blocked the move to negotiate over differences 18 times. Since then, they began making a variety of demands, mostly to defund or delay Obamacare, in exchange for keeping the government open.

Debt ceiling

Congress raises the debt ceiling in order to allow the Treasury Department to borrow enough money to meet all of the country’s obligations and pay back the debts it owes. That has happened routinely in the past, including seven times under President George W. Bush. But since 2010, Republicans have been attaching demands to an increase in the debt limit. This brought the U.S. to the brink of default, or the risk of the country being unable to pay its debts, in 2011. That led to the first downgrade of U.S. debt in history and major economic consequences. If the debt ceiling isn’t raised, somehaveclaimed that Treasury can simply “prioritize” payments, or in other words decide which bills to pay first, such as Social Security checks and debt creditors. But many, including Treasury Secretary Jack Lew, multipleRepublicans who worked in the Bush administration, the conservative American Enterprise Institute, Goldman Sachs, and the Bipartisan Policy Center, have said that that plan is unworkable. And even if it were workable, it would still mean the country didn’t pay some of its bills, which could have a big impact on how lenders view the government.

Economic Impact

Shutdown

The government shutdown has been estimated to cost $300 million a day at the start, a price tag that will accelerate as it drags on. All told, it could shave about 1.4 percent off of economic output, and If it lasts between three and four weeks, it could cost the economy about $55 billion. Compared to past shutdowns, this is already one of the largest and longest because it isn’t just taking place during weekends and it is impacting virtually every government agency. This racks up costs in a variety of ways: The loss of paychecks for the 800,000 furloughed federal workers will suck about $1 billion a week from the economy. Federal spending will be reduced by about $8 billion, which could reduce GDP by 0.8 percent. Shuttered national parks cost local communities $76 million a day. The government will also lose out on billions in tax revenue. In the end, the shutdown will likely end up increasing the deficit.

Debt ceiling

The U.S. has never actually defaulted on its debt, but while it’s unknown just how bad it would be, all signs indicate that the impact would be catastrophic. The Treasury Department has warned that it could create “a recession more severe than any seen since the Great Depression.” Its report looked at what happened in 2011, when the country barely skirted by default, and found that episode led to a sharp fall in consumer and business confidence, intense turmoil in financial markets that “persisted for months,” and a slowdown in job growth. If the U.S. actually defaulted on debts, investors could become unwilling to lend to the country, something that “forever raises our borrowing costs and lowers our standard of living tomorrow,” as Matthew O’Brien writes at The Atlantic. At the very least, it will result in essentially a 32 percent government spending cut at a time when spending cuts have already been hurting economic growth.

In two words: probably everyone. We know that the last time around, when the country narrowly avoided defaulting, household wealth fell by $2.4 trillion between the second and third quarter of 2011. Retirement assets dropped by $800 billion, and the average mortgage holder, who owed about $235,000, saw an increase in monthly payments of about $100. The immediate impact of the reduction in government spending would slow the recovery. But it could throw financial markets into serious turmoil, putting the country back into recession. Missing one interest payment on debt could send the S&P stock index plummeting by 45 percent. Some have said it could have a worse impact than the fall of Lehman Brothers, an event that resulted in the stock market losing half of its value. It would also raise interest rates for all borrowers, from the government to taxpayers.